Russian stocks face 'volatile and dangerous week'

Chris Weafer, senior partner at Macro-Advisory Limited, says that the "dangerous and volatile" politics around the Ukraine crisis this week will hit Russia stocks.

Russian stocks could be in for a bumpy ride this week as tensions in Crimea escalate once more and investors respond to growing fears about further sanctions.

U.S. President Barack Obama is on a tour of Europe this week and he is expected to press European leaders for a stronger response to the Russian Federation's annexation of Crimea.

The Russian MICEX index has fallen 13 percent so far this year and shares of Russian gas producer Novatek sunk over 10 percent last week following the announcement of sanctions. The index closed down 0.7 percent on Monday.

Chris Weafer, senior partner at Moscow-based firm Macro-Advisory Ltd, said that so far Russian equities have been responding to the threat of more sanctions to come.

"It is the threat of the sanctions that has been doing the damage," he told CNBC. "The sanctions that we've seen thus far, you could say, have no direct impact on the operations of the companies. Novatek is a good example. It fell 10 percent last week because one the owners happens to be on the sanctions list, but the sanctions only affect his travel and personal wealth."

The first round of sanctions from both the U.S. and the E.U., which came out earlier in March, were viewed as weak, but a second round announced last week seemed to have more far-reaching impact. Visa and MasterCard have stopped providing services for clients at the two Russian banks, Rossiya and SMP, which have already been targeted by sanctions.

As the U.S. and Europe ponder their next steps, Russia started the week by extending its own list of sanctions, this time barring 13 Canadian individuals from entering the country. These include aides to Prime Minister Stephen Harper, as well as politicians and the head of the Ukrainian Canadian Congress, Paul Grod.

This followed a similar ban instigated last Thursday on nine U.S. lawmakers, including House Speaker John Boehner, Senate Majority Leader Harry Reid, Senate Foreign Relations Committee Chairman Robert Menendez and Senator John McCain.

"It's the threat that sanctions could be extended to something much more serious in terms of trade bans or access to financial markets. That's what the equity market has been reflecting rather than what's happened so far," Weafer said. He warned Russian stocks could face a "very, very volatile and dangerous week".

He emphasiszd that Novatek remained a top stock pick given that it was going into the LNG (liquefied natural gas) business and it had very fast earnings growth.

Apostolos Bantis, credit analyst at Commerzbank, added that the political crisis was clearly affecting the market, but that Russia's fundamentals remained resilient.

"Most of this underperformance is driven by the political escalation rather than fundamental risks," he said. "We think that currently valuations of Russian bonds are particularly appealing… and it's time for investors to start slowly re-entering the sector."

He added: "There is risk but at the same time if you look at the fundamental picture we don't really see major concerns."

Weafer said that the Russian debt market was still a good entry point for investors, with the country's balance sheet strong and the budget in surplus, although on Monday Russia's economy minister announced that the cost of integrating Crimea into Russia would be about 100 billion rubles ($2.8 billion) a year.

Apostolos Bantis, credit analyst at Commerzbank, argues that valuation of Russia bonds is "particularly appealing" right now and says that beyond geopolitical risks, there is little downside for the Russian economy.

ABN Ambro Private Banking's Dider Duret did argue that the equity market could still represent an opportunity for investors for now, although the future remained murky. "With the geopolitics I think we need to have a long term goal – where do we go on that front – because the short term will probably represent an opportunity to position," he said.

"Probably in terms of the geopolitics, the game is about to find a deal between the West and Russia, with Ukraine drifting into the sphere of Europe but this has a price and Crimea is the price. We need to come to terms with this new reality of geopolitics. But from the business point of view we need to really position vis-a-vis the earnings growth of the companies."

That was why Weafer said that the drop in gas producer Novatek's shares last week was "unwarranted and that with Russia moving into the LNG business, Novatek would be at the forefront of that. Still, it could be a potentially difficult week ahead for Russian stocks.

Leaders of the G-7 nations are holding talks in The Hague on Monday to further consider how to respond to Russia's annexation of Crimea.

Russian President Vladimir Putin remains unperturbed by Western sanctions: Russian troops entered a Ukrainian marine base in the Crimean port city of Feodosia early on Monday,using stun grenades and automatic weapons as they charged in, according to a Ukrainian military official speaking to Reuters.

Furthermore, NATO's Supreme Allied Commander Europe, U.S. Air Force General Philip Breedlove said at the weekend that Russia had amassed a large force on Ukraine's eastern border. Reuterscited him as saying he was concerned the Russians may also present a threat to Moldova's separatist Transdniestria region.

Weafer said equities were "super sensitive to news flow".

"You have the president of the U.S., the president of China, all in Europe at the same time...There's going to be a lot of Russia-bashing and a lot of heightened politics and we'll see that in the equity market."